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What to do about lock-in of property fund that accounts for 20pc of pension plan?

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Query: I am in my 50s. I have a personal pension plan in which I have invested in several property funds. Those property funds have taken a battering recently and so I tried to switch out of them, only to be told by my pension provider that the fund is suspended and it is not possible to switch out of it while the suspension is in place. What should I do? About a fifth of my pension fund is in these suspended property funds. Niall, Co Meath

Answer: Property portfolio funds with an exposure to Irish commercial property have been successful in recent years.

For the long-term investor, which fits your profile as a pension investor, these funds are cyclical. This asset class will form part of your portfolio and it is important to focus more on when you expect to draw down the funds rather than the specific fluctuations in performance.

An investment weighting of 20pc is reasonable in this asset class and in general, over a long investment period, an annualised return of around 4pc is the targeted return.

You mention that the fund is suspended. I would speculate that this means that a notice period is required before access to your money is granted. This is to protect the current investors while maintaining the integrity of the property valuations. It is normal after such a strong growth cycle for such a notice period to come into play.

As mentioned, maintaining this asset class over the long term at this level is a reasonable investment. However, to ensure the specific funds you are invested in meet with your expectations, there are four questions you should clarify with the fund managers.

First: Is the fund leveraged? This can have an impact on when properties may need to be sold and it would be preferable if no leverage is in place.

Second: What is the breakdown on the properties held and the tenancies in place. This will give you an indication as to how likely the property is to maintain its capital value - and how much rental income is likely to be earned from the property.

Third: If there is a retail exposure, could it be difficult to collect rent?

Fourth: As a result of Covid-19, there is a real possibility the nature of work will change: will the demand for expensive office space continue as a requirement into the future? It is worth clarifying any innovations the managers of the fund foresee to counter this risk.

 

Cashing in pension in early 40s

Query: I have been on reduced pay since the coronavirus crisis kicked off. I have a defined contribution pension through work. I'm wondering if I can take money out of my pension to help me get through the coming weeks or months. I am 44. Joanna, Co Kildare

Answer: Unfortunately, you cannot access your defined contribution pension as a 44-year-old.

The term used to access pension funds is 'pension liberation'. As the name indicates, pension liberation means liberating your pension funds by accessing them early.

In Ireland, the only reason you might be able to gain access to a pension ahead of retirement is due to poor health, such as that caused by a long-term disability.

Otherwise, you are required to wait until you are 50 before you can access your pension funds in the case of an occupational pension scheme - or 60 in the case of a Personal Retirement Savings Account (PRSA) or personal pension plan.

The reason for this is that the Revenue Commissioners grants you tax relief at your marginal tax rate as an incentive to you to save for retirement - and not for accessing these funds ahead of time.

From experience, people sometimes mention that they heard of access in the past. This is correct. For three years from March 2013, the government granted a once-off access to up to 30pc of Additional Voluntary Contributions (AVCs) made to a pension, but this option is no longer available.

Finally, you mention reduced pay as a result of the coronavirus crisis. The Government have been very proactive from early in this crisis to provide support for such a scenario.

Your employer would qualify for the Covid-19 wage subsidy scheme if it is unable to pay normal wages and normal outgoings fully.

 

Stock market falls and pension

Query: I am due to retire next year. I have a defined contribution plan through work. Most of my pension fund is invested in medium-risk equities and I am worried about the impact which the recent coronavirus-related stock market volatility could have on my fund. Is it too late now to take steps to protect my pension fund? Tom, Co Cork

Answer: It is not too late to protect your pension fund. You say that you are due to retire next year and, by extension, I take that as a presumption that you intend to draw down the value of your pension plan to fund your retirement.

On retirement, you will have the option of accessing a tax-free amount with the balance then being organised in a manner which is most beneficial to your circumstances.

With such a short period to draw-down, your focus should be to preserve the value of your funds to maximise tax-efficiency at the point of retirement.

Equities have rallied significantly since the market correction at the beginning of the crisis. This should not be the focus of your attention though. As an asset class, equities will always be more volatile than cash or bonds.

For a pension investor right up to five years from retirement, being invested with a majority position in well-diversified global equities would be the recommended strategy. This risk position should be tapered off, though, as you get closer to retirement. Diversifying your investment into a cash position when you are so close to retirement is the recommended route to preserve your funds. Being currently invested in equities should ensure the investment is liquid and there are no barriers to the fund switch.

Once you move to post-retirement age, a new discussion is required. Typically, at retirement you will have the option of investing into an annuity, which has the advantage of paying a set income for the rest of your life, or you can invest in an Approved Retirement Fund (ARF - a post-retirement investment vehicle).

The ARF option has estate planning advantages and gives you more control over the income requirements, taxation and investment decision-making. An ARF requires the draw-down of a taxable income of at least 4pc each year. This may form the main source of your income for anything up to 40 years. To generate this income over time, reverting to a well-diversified global equity portfolio has historically given people the best chance of achieving this requirement.

In summary, move into cash immediately ahead of your imminent retirement. Optimise your pension draw-down and at that point seek clear advice with a financial planner on the most suitable vehicle for your future income.

  • Email your questions to  lmcbride@independent.ie or write to 'Your Questions, Sunday Independent Business, 27-32 Talbot Street, Dublin 1'.  
  • While we will endeavour to place your questions with the most appropriate expert for your query, this column is not intended to replace professional advice.

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